Farmland Forecast

Marc Schober is the editor of Farmland Forecast an educational blog devoted to investments in agriculture and farmland.

Chinese Imports to Change Grain Markets

Aug 09, 2010

China is entering a “new era” of corn buying. The world’s most populous country may import as much as 15 million tons of corn in 2015, according to the U.S. Grains Council. China has historically been self-sufficient in corn production, but demand is starting to outpace supply as the nation continues to consume more protein.

Chinese imports of corn will grow from 1.7 million tons in 2010 to 5.8 million tons in 2011, and to 15 million tons in 2014-15 according to Hanver Li, Chairman of Shanghai JC, speaking to the U.S. Grains Council. 15 million tons of corn translates to the U.S. exporting roughly 600 million bushels of corn, which will have a substantial impact on corn stocks.

Mr. Li expects that meat consumption per capital will grow 6.9% by 2015, and milk consumption will grow by more than 50% over the same period. Rural areas will drive meat demand, while urban centers will drive milk demand.

Historically, China has been self-sufficient in corn production and a net exporter, but strong demand and poor weather this year has led to production shortfalls. As the population continues to expand and diets transition to more protein, Mr. Li believes that “China’s ability to produce corn can’t keep up with that growth.”

To ease domestic prices, the Chinese government has been selling reserves. In 2010, the government has sold 5.7 million tons of corn from reserves so far and sold 9.6 million tons in 2009. The amount of government supplies is unknown, but the government can only temper prices for so long. Imports of corn will be the primary solution to solve the shortfall.

Substantial Imports of Soybeans

We see China’s transition to a net importer of corn very similar to China’s transition to becoming a net importer of soybeans. Before 1995, China was a net exporter of soybeans but by 2010, it is the world’s largest soybean importer and is expected to import more than 40 million tons of soybeans this year.

Soybean imports have become more attractive to China as domestic production is at a cost disadvantage compared to overseas production. Oil extraction rates for Chinese soybeans are 17-18% compared to 22% for imported soybeans. Average Chinese soybean yields are expected to be 25.3 bushels per acre (1.7 metric tons per hectare) in 2010/11, according to the USDA, which is substantially lower than the estimated U.S. average of 42.9 bushels per acre for 2010/11.

Over the past few years, Chinese soybean yields have not changed much; yielding 1.72 MT per hectare in 2006, and 1.67 MT per hectare in 2009, according to the USDA. China’s priorities shifted away from soybeans and towards corn in the late 1990’s and into the 2000’s. Since South America and the U.S. were producing soybeans much more efficiently than China, the Chinese decided to focus on boosting corn production, and importing soybeans instead.

Lack of IP protection

Although Chinese soil and climate is not quite as fertile for agriculture as it is in the U.S. Corn Belt, yields could be higher in China if intellectual property rights were stronger and genetically modified seeds were permitted. Strong patent protection in the U.S. allows companies like Monsanto to sell their genetically modified seeds in the U.S., which are designed to tolerate droughts and weeds. Monsanto and its competitors will not enter markets with poor intellectual property laws, such as China, in fear that their patented traits will be copied.

China currently does not allow genetically modified seeds to be planted, but they do import genetically modified grains and oilseeds. Once China revises its policy to allow biotech seed use, U.S. companies will still be leery of entering the market due to the lack of intellectual property rights.

China’s Insatiable Appetite for Grains

Rapid population and economic growth in China has driven the country’s insatiable demand for grains. Economists have long shown that as GDP rises and a middle class develops, consumption of protein also rises. The transfer to protein will have a significant impact on the demand for grain as roughly one pound of meat requires seven pounds of grain.

The Brookings Institution estimates that by 2021, China’s middle class could grow to over 670 million, compared to only 150 million in 2010. As the world’s middle class continues to develop over the next decade, the demand for grains will grow exponentially.

China has overtaken the U.S. as the world’s dominant meat consuming market in 2000. China’s meat intake per person went from 25kg per year in 1990 up to 50kg in 2000 and is at roughly 53kg in 2008 according to the World Resource Institute. The increase in meat consumption has lead China to consume four times as much additional grain since 1995.

Despite the drastic increase in meat consumption, on a per capita basis, China significantly lags behind the U.S., which averaged 123.8kg of meat per capita in 2000. As China’s economy continues to develop, China’s meat consumption per capita will catch up with developed economies.

China’s Income Elasticity

Economists have recorded the effect on demand for goods as incomes rise among consumers in both developed and developing economies. For every dollar rise in income, demand grows rapidly when incomes are low and less rapidly when incomes are already high. China has an income elasticity of 0.47 while the U.S. has an incomer elasticity of 0.15. Historically, rises in income have precipitated rises in the consumption of higher protein foods including meat, dairy, eggs and poultry products.

China’s State Council predicts that China’s annual GDP growth rate will increase roughly 7% per year from 2010 to 2020. This could lead to a per capita GDP of $5,900 in 2020, compared to $4,000 per capita in 2009. The USDA estimates that of every new dollar spent in China, 40% is allocated to food.

China’s Land Imbalance

The primary problem facing China’s ability to feed itself is its land imbalance. China has roughly 20% of the world’s population although only 7% of the world’s arable land. The supply of arable farmland in China is decreasing rapidly as well. China has lost 20% of its arable land due to erosion, desertification, and development, and is expected to lose 10 to 15 million more hectares by 2020.

To solve this imbalance, China committed $5 billion for agricultural development in Africa in 2008. China is sending expatriate farmers to Africa to cultivate the land and export the grain directly back home to ensure a consistent supply of grains. According to the Chinese Ministry of Commerce, over one million Chinese are farming in Africa dispersed throughout 18 countries.

U.S. to Benefit from Chinese Imports

Where will China import all this corn from? The first place they will turn to is the U.S., which is the world’s largest corn exporter, accounting for 60% of global corn exports in 2009. Argentina and Brazil only account for roughly 10% of global exports each.

If China imports an incremental 600 million bushels of corn in 2014 from the U.S., using the USDA’s baseline projections, U.S. corn ending stocks would be 960 million bushels. This would put the Ending Stocks to Use Ratio at 6.3%, the lowest level since 1995.

2010 is a major turning point in the grain market. The Chinese transition to becoming a net importer of corn will have a substantial implication on the world’s corn supply.